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Tue 5 Jan 2016 02:41 PM

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Saudi and Iran tussle won't dent Gulf bond plans

Gulf sovereigns to place $15bn of bonds in 2016; expected to shrug off the fierce feud that has erupted between Saudi Arabia and Iran

Saudi and Iran tussle won't dent Gulf bond plans

Middle East sovereigns are expected to shrug off the fierce feud that has erupted between Saudi Arabia and Iran and go on to place a record amount of debt in 2016, with a debut dollar deal from Saudi still anticipated to be the star of the show.

Gulf Cooperation Council sovereigns are tipped to raise US$15bn from the bond market this year - more than all GCC sovereign dollar debt issuance from 2013 to the end of 2015.

"That's the area where there is going to be a lot of activity," said a syndicate banker, one of several officials at international banks who began sounding out Saudi Arabia last year for a potential dollar transaction.

Not only Saudi Arabia but Oman, Qatar, Dubai, Bahrain and Kuwait are all touted as issuers for 2016 by bankers.

But the year has got off to a shaky start in the Gulf, with Riyadh cutting diplomatic ties with Tehran on Sunday, after its embassy was stormed in Iran in response to Saudi's execution of Shi'ite Muslim cleric, Sheikh Nimr al-Nimr.

Bahrain and the United Arab Emirates both curtailed Iranian diplomatic presence in their countries on Monday, with Manama ordering Tehran's diplomats out of Bahrain within 48 hours. Meanwhile, aggression between Israel and Lebanon is rising along the border, with attacks made by both sides, Reuters reported.

While the ramped up political risk temporarily pushed oil prices higher to US$38.5 a barrel on Monday morning, bankers say the escalating conflict will have little impact on sovereign bond issuance from the region.

"The Saudi/Iran situation has been bubbling for a long time," said an emerging markets DCM banker. "I don't think it will have much of an effect, if any."

The syndicate banker said: "The back and forth between the countries is going to continue happening, but investors have been in the region for a while and know that it will settle."

Saudi, which could be the Gulf's biggest bond issuer this year if the rumoured debut deal materialises, announced at the end of last year a series of tightening measures in its 2016 budget to mitigate the affects of cheap oil.

Saudi Arabia ran a record budget deficit of Sr367bn (US$97.9bn) in 2015 because of low oil prices, the country's Council of Economic and Development Affairs said last week.

The belt-tightening in Saudi's budget signals the sovereign's intention to play a long-term game to keep oil prices low, forcing Iran to cut its own budget and help Riyadh maintain its regional dominance, according to Tim Ash, CEEMEA strategist at Nomura.

He said: "It's like the arms race between Reagan's US and the Soviet Union in the 1980s, but playing out via oil and budgets between Saudi Arabia and Iran today.

"Saudi could raise global oil market prices tomorrow if they signalled the intent to moderate production - the reality is they want to keep oil prices low to hold back investment into the Iranian oil sector."

The budget changes include reduced energy subsidies and an increase in defence and security spending, in part because Saudi Arabia is also engaged in a conflict with Yemeni army units allied to the Iran-allied Houthi militia.

"One of the main reasons they will need financing is because they have been funding the war in Yemen," said the DCM banker, who added that he is hoping to pitch for the Saudi deal.

Wayne 3 years ago

I dont think Saudi Arabia is being honest about their budget deficit. According to my calculations, it is likely closer to $150Billion. I think they are trying to hide the damage to portray
strength that they don't posses.